Lecture 2 Flashcards
(32 cards)
1
Q
GDP can be defined as:
A
- Total market value of domestically-produced final goods and services over a given period
- Total expenditure on domestically-produced final goods and services over a given period
- Total income earned by domestically-located factors of production over a given period
2
Q
GDP measures
A
- Production measure of GDP: the number of goods produced in the economy
- Expenditure measure: the total purchases in the economy
- Income measure: all the income earned in the economy
- All three approaches give identical measures of GDP
3
Q
Production = Expenditure = Income
A
- In every transaction, the buyer’s expenditure becomes the seller’s income
- Thus the sum of all expenditure equals the sum of all income
4
Q
Income approach
A
- To produce goods/services firms need to pay labour and capital
- Can be tangible (goods) or intangible (services)
- Total income = labour income + capital income
5
Q
Capital income
A
Rentals, dividends (company profits), interests, paid to owners of stuff
6
Q
Income approach: labour share
A
Total share of GDP inputs:
- Share of GDP to labour: approx 2/3
- Share of GDP to capital: approx 1/3
7
Q
Consumption
A
- The value of all goods and services bought by households
- Includes: durable goods, non-durable goods, services
8
Q
Investment
A
- Spending on the factor of production capital
- Spending on goods bought for future use
- Business fixed investment, residential fixed investment, inventory investment
9
Q
Business fixed investment
A
Spending on plant and equipment that firms will use to produce other goods & services
10
Q
Residential fixed investment
A
Spending on housing units by consumers + landlords
11
Q
Inventory investment
A
The change in the value of all firms’ inventories
12
Q
Government spending
A
- Includes all gov spending on goods and services
- Excludes transfer payments e.g. unemployment insurance payments because they do not represent spending on goods/services
13
Q
Net exports
A
The value of total exports minus the value of total imports
NX = EX - IM
14
Q
Production Approach
A
- Sum up value added at all stages of production
- A firm’s value added: the value of its output minus the value of the intermediate goods the firm used to produce that output
15
Q
Value Added
A
- GDP sometimes called value added
- VA = value of sold good - value of intermediate goods
- GDP only includes value of final good/service = sum of value added at every stage of production
16
Q
Measurement issues for GDP
A
- Used goods do not enter GDP as it was already entered before
- Unsold goods are treated as inventories (as if bought by the firm/producer, not the household)
- Becomes part of the value of the firm
- Inventories can depreciate and perish
- If/when sold later, does not enter GDP: it is a used good (technically, expenditure by household but dis-expenditure by firm)
- If house is owned, impute implied rental prices
- But usually don’t impute for smaller items, like cars or other durable goods
- Home production (cooking/cleaning) also not imputed
- But public services which we don’t pay for directly is imputed by public workers’ wages: this works because of the GDP duality
17
Q
Nominal GDP
A
- Stuff computed at market prices
- Changes with prices and quantities
18
Q
Real GDP
A
- Use a fixed price
- Changes only with quantities
19
Q
Issues with nominal/real GDP
A
- Doesn’t reflect quality
- GDP difference changes depending on the choice of base prices
20
Q
GDP deflator
A
- Compare cost of living to year t
- Includes everything, including private jets, firm investments, gov expenditures
- Useful but doesn’t reflect that we would buy more oranges and less apples if apples get expensive
- Doesn’t include prices of imports
- So may understate changes in actual cost of living
21
Q
CPI
A
- Use representative consumption basket of Ci’s
- Not only i’s but Ci’s also fixed (assume you buy the same stuff at the same amounts every year)
- Keep basket the same as long as possible
- So overstates changes in actual cost of living (doesn’t account for price substitution)
- Both indices still have the problem of missing on quality
22
Q
The 3 are not independent:
A
- Output = GDP is produced by employed people (aggregate supply)
- Employed people earn income = GDP and spend expenditures = GDP
(aggregate demand) - Wages are determined in equilibrium by demand and supply of workers
- Prices are determined in equilibrium, by aggregate demand and supply for goods
23
Q
Long run
A
- Typically rely on neoclassical theory
- Supply side economics: assumes aggregate supply of factor inputs are fixed
- Prices and wages are fully flexible so inflation has no effect on output or employment
24
Q
Short run
A
- Will rely on Keynesian theory
- Demand side economics
- Prices are fixed or sticky (hard to change)
- Aggregate supply adjusts to meet demand
25
What determines long run aggregate supply?
- Firms supply goods/services by employing labour
- Labour demand: firms’ technology and profit-maximization
- Labour supply: workers find and lose jobs
- Labour market equilibrium: pins down long-run employment L*
- Labour market equilibrium determines long-run aggregate supply
26
Production function
- A certain number of inputs are used in the production of the good
- Inputs: labor (L), capital (K)
- Shows how much output (Y) can be produced given any number of inputs (K and L) for productivity parameter A
27
Marginal Product of Labour (MPL)
The amount of extra output produced when labour input increases by one unit
28
Decreasing returns to scale (DRS)
- MPL is decreasing in L
- L workers can always produce more than L-1 workers
- But the (L+1)th worker will not increase output as much as the Lth worker
29
Graph of the production function
1. The slope of the production function equals the marginal product of labour (MPL)
2. As more labour is added, the MPL declines
30
2 important assumptions for macro
1. Firms are price-takers: assume monopoly power washes out in aggregate
2. All firms behave similarly according to a DRS technology so only need to consider one firm
31
Profit maximisation
- Competitive firms choose how much labour to demand to maximise profits
- More workers always increase revenue but at a declining rate (MPL)
- More workers increases labour costs at a constant rate (W)
- Hire factors of production until extra revenue from increased production equals extra costs
32
MPL
Labour demand is decreasing in real wage
